How Big of a Deal Are Rising Interest Rates?

You keep hearing, “The feds are planning to increase rates” Why is this a big deal?

If you are planning to buy a home an increase can have a dramatic impact on how much home you qualify to buy. For every .5(one-half) percent increase in interest rate your purchasing power may be decreased by 4 to 5 percent. Often people want to wait until they save more for a down payment, but this often isn’t the best strategy. You may be better off locking in a lower interest rate now. The effect of a larger down payment may be minimal compared to the increase caused by a rise in interest rates.

Here are examples of the effect on a $400,000 and $700,000 home. In these examples we are assuming 20% down and not calculating in property taxes or insurance. The payment is principal and interest only (P&I).

You will see that a 2% increase in rates causes the payment for a $400,000 home to go up by $361.00 and by $$684.00 for a $700,000 home. Another way to see this effect is in the decreased amount of home you can afford as interest rates rise. This is the amount of loan a person who can afford a $2000 or $5000/month payment would qualify for based on raising interest rates. The person who can afford a $2000/month payment sees a nearly $50,000 decrease for every percent increase while the $5000/month payment sees a decrease of over $100,000.

While it’s tempting to wait and see if prices will decrease and buy at the bottom or to save more for a down payment the more likely scenario is that likely interest rate hikes will take place and your buying power will decrease at a more substantial rate than you would have gained by waiting. Great deals can be found in November and December. Why Wait?